Indian Stocks Drop With Rupee as Oil Raises Inflation Concern

Indian stocks dropped for a second time this week amid concern rising oil prices and below-normal rainfall will fuel inflation, limiting the central bank’s scope to ease monetary policy.

Power-equipment maker Bharat Heavy Electricals Ltd. (BHEL) slid the most in a week, pacing losses in a measure of engineering companies. Reliance Industries Ltd. (RIL) had the biggest retreat in three weeks. Hindustan Petroleum Ltd. (HPCL) slumped 5 percent, pacing losses among state-owned refiners.

The S&P BSE Sensex (SENSEX) dropped 1.1 percent to 25,246.25 at the close, after swinging between a gain of 0.4 percent and a loss of 1.6 percent. The rupee dropped for a second time this week, adding to concern that a spike in oil prices because of the Iraq conflict will spur inflation in India, which imports about 80 percent of its fuel. Rainfall has been 49 percent below the 50-year average this month, the weather office said yesterday.

“The government will have to get into fire-fighting mode as oil prices and a weak monsoon are the biggest threat,” U.R. Bhat, managing director of Dalton Capital Advisors India Pvt., said by phone from Mumbai today. “We expect the markets to trade weak till the budget next month.”

The government will offload about a quarter of its rice stockpiles and ease curbs on selling fruits and vegetables to stem inflation, Food Minister Ram Vilas Paswan said yesterday. It will also help states import cereals and cooking oil, and fix minimum export prices for potatoes to discourage exports, Finance Minister Arun Jaitley said separately.

Food Management

Prime Minister Narendra Modi faces the task of reviving the economy after his party became the first in three decades to win a parliamentary majority in India. Growth is holding near a decade-low and retail inflation has averaged about 10 percent in the past two years, eroding the purchasing power of more than 800 million people who live on less than $2 a day.

Food costs have stoked inflation in the last couple of months and “the hope is that with appropriate food management these prices will come down,” Reserve Bank of India Governor Raghuram Rajan said in Mumbai yesterday. The central bank left interest rates unchanged on June 3, and said further tightening won’t be warranted if retail inflation stays on course to hit 8 percent in January 2015.

Bharat Heavy slid 2.6 percent, the worst performer on the Sensex. Hindustan Petroleum ended a two-day, 7.6 percent gain. Bigger rival Indian Oil fell 2.3 percent and Bharat Petroleum Corp. decreased 3 percent amid increase in crude oil costs.

Reliance fell 2.1 percent. The company will start at $12 billion telecommunications network next year, part of a $30 billion expansion plan that includes group’s core businesses of polyester, petrochemicals, refining and natural gas, Chairman Mukesh Ambani told shareholders today in the Mumbai.

Fund Flow

The Sensex has increased 19 percent since Jan. 1, the most among BRIC markets, as foreign investors bought $9.9 billion of local shares, the highest net inflow among eight Asian markets tracked by Bloomberg. The gauge trades at 15.5 times projected 12-month profits, compared with the five-year average multiple of 14.5. The MSCI Emerging Markets Index is valued at 11 times.

Brent pared gains as Islamist militants fought Iraq’s government for control of a northern refinery, while the main southern oilfields were spared. Futures almost erased an earlier increase of 40 cents in London. The Baiji refinery in northern Iraq was damaged as Islamist militants fought with the army for control of the country’s largest oil-processing plant. Brent rallied 4.4 percent last week, the most since July.

To contact the reporters on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net; Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net Ravil Shirodkar, Indranil Ghosh

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